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What to Do if You Inherit an IRA

As more and more people open individual retirement accounts (IRAs) it becomes more and more likely that some of those account will pass from the IRA owners to their beneficiaries. Here’s what you need to know if you “inherit” a traditional IRA:

Options for Surviving Spouses
If you are the sole beneficiary of your spouse’s IRA these are your options:
Leave the IRA as it is. You can delay annual distributions of a minimum amount (which you have to pay income taxes on) until your spouse would have turned 70½. You can also withdraw funds from the account without penalty (but you will still have to pay the resulting tax).
Roll over the IRA into a new IRA in your name or treat the IRA as your own. You can now delay annual distributions until after you reach the age of 70½ and you can name your own beneficiaries. However, unless you are over the age of 59½, you will not be able to make withdrawals without incurring penalties.
Options for Nonspouses
If you inherit an IRA from someone other than your spouse these are your options:
Leave the IRA as it is. You will be required to take minimum annual distributions (and pay the resulting income tax on them) spread over your life expectancy.
Roll over the IRA into a new IRA in your name. This is a new option available in 2007. You will still be required to begin taking annual distributions (and paying taxes on them), but you will be able to name your own beneficiaries.